S&P Says Sell Twitter, Shares Overvalued

By Teresa Rivas

S&P Capital IQ’s Scott Kessler initiated coverage of Twitter (TWTR) today with a Sell rating. Kessler writes that while the company has plenty of revenue growth potential thanks to its global presence and early monetization success, Twitter has been spending to support expansion, leading to “considerable losses”: He estimates 30 cents a share this year, with a 14 cent per-share loss next year before turning a 6 cent profit in 2015.

Given this, Kessler writes that a “more proactive product strategy could be warranted” and that the shares’ rally is “largely speculative and driven by momentum.”

He established a $30 price target on the stock, valuing Twitter through peer analysis involving price-to-sales ratios and projected three-year sales growth calculations.

However, that’s not to say that Kessler doesn’t acknowledge Twitter’s powerful brand or growth potential, noting sales have risen swiftly.

Read more highlights from the note:

Revenues nearly tripled in 2012, reflecting an almost 250% increase in the advertising segment. We project that advertising will drive revenue growth of 122% in 2013 and 102% in 2014. We see international as a significant opportunity, especially given that more than three-quarters of TWTR users are based overseas, but only about a quarter of revenues originate from abroad.

We see annual margins improving through 2015, reflecting what we expect will be more successful monetization efforts. We also expect TWTR to benefit from greater scale and efficiencies. However, we see additional new public company expenses and expect TWTR to continue to invest in infrastructure, spend on content partnerships, and pursue international expansion.

Via its November 2013 IPO, we believe TWTR will ultimately generate gross proceeds of $2.1 billion, including an overallotment of 10.5 million shares.

Twitter was down 1.2% at recent check. Earlier this week Robert W. Baird and Susquehanna initiated coverage as well, with Hold ratings.

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